Iraq - The Economy

The economy

FOLLOWING THE 1968 Baath (Arab Socialist Resurrection) Party revolution, Iraq's government pursued a socialist economic policy. For more than a decade, the economy prospered, primarily because of massive infusions of cash from oil exports. Despite a quadrupling of imports between 1978 and 1980, Iraq continued to accrue current account surpluses in excess of US$10 billion per year. In 1980 on the eve of the outbreak of the Iran-Iraq War, Iraq held reserves estimated at US$35 billion. When Iraq launched the war against Iran in 1980, the Iraqis incorrectly calculated that they could force a quick Iranian capitulation and could annex Iranian territory at little cost in either men or money. Using a number of means, Iraq opted to keep the human costs of the war as low as possible, both on the battlefield and on the home front. In battle, Iraq attempted to keep casualties low by expending and by losing vast amounts of materiel. Behind the lines, Iraq attempted to insulate citizens from the effects of the war and to head off public protest in two ways. First, the government provided a benefits package worth tens of thousands of dollars to the surviving relatives of each soldier killed in action. The government also compensated property owners for the full value of property destroyed in the war. Second, the government adopted a "guns and butter" strategy. Along with the war, the government launched an economic development campaign of national scope, employing immigrant laborers to replace Iraqi fighting men.

In 1981, foreign expenditures not directly related to the war effort peaked at an all-time high of US$23.6 billion, as Iraq continued to import goods and services for the development effort, and construction continued unabated. Additionally, Iraq was paying an estimated US$25 million per day to wage the war. Although the Persian Gulf states contributed US$5 billion toward the war effort from 1980 to 1981, Iraq raised most of the money needed for war purposes by drawing down its reserves over several years. Iraq could not replenish its reserves because most of its oil terminals were destroyed by Iran in the opening days of the war. Iraqi exports dropped by 60 percent in 1981, and they were cut further in 1982 when Syria, acting in accord with Iran, closed the vital Iraqi oil export pipeline running through Syrian territory.

The total cost of the war to Iraq's economy was difficult to measure. A 1987 study by the Japanese Institute of Middle Eastern Economies estimated total Iraqi war losses from 1980 to 1985 at US$226 billion. This figure was disaggregated into US$120.8 billion in gross domestic product lost in the oil sector, US$64 billion GDP lost in the nonoil sector, US$33 billion lost in destroyed materiel, and US$8.2 billion lost in damage to non-oil sector fixed capital investment. Included in the lost GDP was US$65.5 in lost oil revenues and US$43.4 billion in unrealized fixed capital investment.

As the 1980s progressed, the Iran-Iraq conflict evolved into a protracted war of attrition, in which Iran threatened to overwhelm Iraq by sheer economic weight and manpower. Although Iraq implemented some cost-cutting measures, the government feared that an austerity plan would threaten its stability, so it turned to outside sources to finance the war. Iraq's Persian Gulf neighbors assumed a larger share of the economic burden of the war, but as the price of oil skidded in the mid-1980s, this regional support of Iraq diminished. For the first time, Iraq turned to Western creditors to finance its deficit spending. Iraq's leadership calculated correctly that foreign lenders, both government and private, would be willing to provide loans and trade credit to preserve their access to the Iraqi economy, which would emerge as a major market and an oil supplier after the war. But the sustained slump in oil prices made foreign creditors more skeptical of Iraq's long-term economic prospects, and some lenders apparently concluded that providing more loans to Iraq amounted to throwing good money after bad. Some creditors were also wary of Iraq's postwar prospects because of Iranian demands for tens of billions of dollars in reparations as the price for any peace settlement. Although Iraq would probably pay only a fraction of the reparations demanded (and that, most likely, with the help of other Persian Gulf countries), a large settlement would nonetheless delay Iraq's postwar economic recovery.

In 1988, as the war entered its eighth year and Iraq's debt topped US$50 billion, the government was implementing comprehensive economic reforms it had announced in 1987. Iraq's new economic policy was designed to reverse twenty years of socialism by relinquishing considerable state control over the economy to the private sector. It was not immediately clear if this move would result in a fundamental and enduring restructuring of Iraq's economy, or if it was merely a stopgap measure to boost productivity, to cut costs, to tap private sector savings, and to reassure Western creditors.